Fannie Mae's Rehab Loan Options: What You Need To Know

Fannie Mae offers rehab loans for single-family and multifamily properties. The HomeStyle Renovation mortgage is a single loan that can be used to buy a home and finance repairs and remodelling. It is based on the property's post-renovation value. The Moderate Rehabilitation Loan is for the renovation of multifamily properties with a minimum of $10,000 of planned improvements per unit.

Fannie Mae's HomeStyle Renovation mortgage

The Fannie Mae HomeStyle Renovation Mortgage is a type of renovation loan or rehab loan. It enables home buyers to borrow both the purchase price of the potential home and any renovation costs and wrap them up into one mortgage loan amount. It is a flexible option for borrowers to renovate or make home repairs with a conventional first mortgage.

The HomeStyle Renovation mortgage loan has specific product requirements and guidelines for which lenders must ensure detailed compliance. Lenders must obtain special approval to deliver these types of loans to Fannie Mae prior to the completion of the renovation work. Renovation work must be completed no later than 15 months from the date the loan is closed.

The money is disbursed to pay for the home purchase at closing, but to use the funds for renovation, an approved contractor must submit plans to the bank for a "draw". After inspections to ensure the work is done, the bank sends the money to the contractor. This limits fraud but is more of an administrative headache than simply using cash for home improvements. The loan funds are placed into a custodial account, and the lender delivers the loan to Fannie Mae. The lender services the loan, managing all project draws and overseeing the renovation process.

Fannie Mae is a government-sponsored enterprise that buys mortgages from banks, allowing them to get debt off their books and use the money to originate more mortgages. This is how banks stay liquid and keep the economy afloat. As a government agency, Fannie Mae exists to help make housing more affordable for mid- to low-income borrowers.

Renovation contract and loan agreement

Fannie Mae offers renovation loans for borrowers looking to renovate or repair their homes. The HomeStyle Renovation Mortgage is a conventional first mortgage that provides a simple and flexible way to finance these projects. The loan is also available for multifamily properties, known as the Moderate Rehabilitation Loan program.

When it comes to the renovation contract and loan agreement, there are several key components to be aware of. Firstly, the renovation contract is a document that outlines the agreement between the borrower and the contractor. It should include the scope of work, timelines, and any relevant regulations that must be complied with. This contract must be kept in the loan file by the lender. Secondly, the renovation loan agreement is a written agreement between the borrower and the lender, outlining the terms and conditions of the loan, including the borrower's promises and obligations, as well as the consequences of defaulting on the loan. This agreement is a custodial document, with the lender maintaining a copy and sending the original to the document custodian as part of the loan delivery package.

The renovation loan agreement should also address the following:

• Default provisions: Clearly state the events that constitute a borrower default, such as failing to fulfil any obligation in the agreement.
• Remedies for default: Indicate the actions the lender can take if the borrower defaults, such as requiring the contractor to obtain specific licenses or insurance policies.
• Inspections: Allow the lender to conduct property inspections to ensure the renovation work is progressing as planned.
• Costs and expenses: Outline the borrower's responsibility to cover all costs and expenses associated with the agreement, including any cost overruns or enforcement costs in the event of default.
• Timelines: Agree on a timeline for completing the renovation work, typically within 15 months from the date of loan closure, with provisions for extensions if needed.
• Lien waiver: Before the final disbursement upon renovation completion, obtain a lien waiver from the contractor, subcontractors, and suppliers, or a clear title report releasing all liens.

It is important to note that Fannie Mae has developed model documents for both the renovation contract (Form 3730) and the lien waiver (Form 3739). These can be used as a starting point, but appropriate changes must be made to comply with applicable laws and regulations.

Eligibility requirements

Fannie Mae offers two types of rehabilitation loans: the HomeStyle Renovation Mortgage and the Moderate Rehabilitation Loan.

The HomeStyle Renovation Mortgage is a flexible way for borrowers to finance repairs and remodelling using a single loan. It is available for people who want to buy a home or refinance an existing mortgage. To be eligible, you must:

• Find a Fannie Mae-approved lender that offers the HomeStyle Renovation Mortgage and get pre-approved.
• Take out a mortgage for the full purchase price minus your down payment.
• Receive additional loan proceeds to renovate for up to an additional 75% of what the home is estimated to be worth after renovations.
• Have the renovation plans reviewed by an appraiser to determine the property's post-renovation value.
• Ensure that all inspections are completed when local codes require a post-completion inspection and/or a certificate of occupancy.
• Ensure that the property meets Fannie Mae's General Property Eligibility requirements, including the requirement that the property be safe, sound, and structurally secure.
• Sign a written renovation loan agreement with the lender, stating the original principal amount of the related promissory note payable to the lender.
• Have the contractor sign a renovation contract, agreeing to charge no more than 50% of the materials cost upfront, with the remaining costs paid after the work passes inspection.
• Complete the renovations within 12 months.

The Moderate Rehabilitation Loan is intended for the rehabilitation of apartment and multifamily properties. To be eligible for this loan, you must:

• Have an existing loan in good standing.
• Provide a thorough work schedule and budget for the renovations.
• Have a good track record of successfully completing similar projects in the past.
• Pay the necessary fees for third-party reports and loan application.
• Agree to a loan term of between five and 30 years, with flexible amortizations of up to 30 years.
• Agree to an LTV allowance of up to 80%.

Please note that these are general guidelines, and it is important to refer to the specific eligibility requirements and guidelines provided by Fannie Mae and their approved lenders.

Multifamily properties

Fannie Mae offers a range of loans for multifamily properties, including those for moderate rehabilitation. These loans are intended for the moderate rehabilitation of apartment and multifamily properties. They are non-recourse, have terms of between five and 30 years, and permit LTVs of up to 80%.

Fannie Mae's Moderate Rehabilitation Loan can be used for the acquisition or refinancing of conventional multifamily properties with at least $10,000 of planned improvements per unit. The loan offers flexible amortizations of up to 30 years, with interest-only loans available. It is fully assumable with lender approval.

In addition to the standard Moderate Rehabilitation Loan, Fannie Mae also offers a Supplemental Loan for properties that have recently undergone rehabilitation with a Fannie Mae loan but now need additional funds for further improvements. The Supplemental Loan has terms and amortizations of up to 30 years, though they must align with the original loan's schedule. It offers a combined LTV allowance of up to 75% (potentially higher for affordable properties), and it is also non-recourse and fully assumable with lender approval.

Fannie Mae also offers a Reduced Occupancy Affordable Rehab (ROAR) loan for Multifamily Affordable Housing (MAH) properties that require significant renovations. The ROAR loan offers generous terms, including allowing rehab costs of up to $120,000 per unit, a 90% "stabilized" LTV allowance, and a minimum "stabilized" DSCR of 1.15x. During the rehab period, the ROAR loan only requires 50% occupancy and a DSCR of 1.00x.

Fannie Mae also provides loans for rural multifamily properties through its Rural Development Guaranteed Rural Rental Housing Program Loan, offered in partnership with the USDA's Office of Rural Development (RD). This loan has an LTV allowance of up to 90% (up to 97% for non-profits with Fannie Mae approval) and fixed-rate loan terms of up to 40 years.

Fannie Mae's Green Financing programs offer additional incentives for those making green improvements to their multifamily properties. The Green Rewards program allows 5% more in loan proceeds, the Green Preservation Plus program permits higher LTV allowances and lower DSCR requirements, and the Green Building Certification Pricing Break program provides a 0.10% interest rate discount. All three programs qualify for this discount, making them increasingly popular for multifamily borrowers.

RenoFi Loans

Fannie Mae does offer renovation loans, known as the HomeStyle Renovation mortgage. This loan provides a flexible way for borrowers to renovate or repair their homes with a conventional first mortgage. However, there are several reasons why some people may prefer a RenoFi Loan over a Fannie Mae HomeStyle loan.

To qualify for a RenoFi Loan, a credit score of at least 620 is required, and the loan must be used for home renovations. RenoFi will conduct an appraisal to determine the "after-renovation value" of the property. The loan can be used for renovations on a primary residence currently owned or being purchased, as well as investment properties (borrowing is based on the current value for investment properties). It is important to note that RenoFi's services are free for homeowners, and they work with specific credit unions to offer the loan.

RenoFi offers variable and fixed-rate home equity lines of credit, as well as cash-out refinances, to borrowers seeking funding for home improvements. Their unique approach, based on the post-renovation value of the home, may allow borrowers to access more funding compared to traditional home equity loans or lines of credit. RenoFi acts as a broker, connecting customers with lender partners, and has a strong availability score due to its presence in most U.S. states and Washington, D.C.

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